Shared Services Link.com, an online community for leaders in financial shared services, recently posted a commentary on cost reduction. “Who wouldn’t want a 50% reduction in financial planning and analysis costs?’ it asked.
“First optimise the work processes, systems, and organisation structure for maximum efficiency, and then off-shore the back-office tasks for wage arbitrage savings. Once only common for accounting processes, the centralisation, standardisation and offshoring of FP&A activities is now not only possible, but proven across companies of different operating structures and sizes,” was its recommendation.
There is, however, a hidden risk. When FP&A design decisions focus too much on efficiency and not enough on enabling the execution of business strategy, the result is a streamlined FP&A organisation that has a weakened ability to identify and take advantage of opportunities to create value. In such cases, the loss in broader business effectiveness far outweighs any productivity or cost benefits from FP&A organisation efficiencies.
Protection against this risk is simple in concept, but challenging in execution. It requires active consideration of the intended role of the FP&A organisation to support the business strategy of a company. Why does the company need an FP&A organisation? What is the unique role that only FP&A can play to support the execution and optimisation of business strategies? Only after the role of FP&A is decided is it possible to optimise the FP&A work processes, systems, and organisation structure without risking a weakened ability to create and execute business strategy.
Leadership Role of FP&A in Business Strategy
To help define the role of FP&A, imagine that every member of an existing FP&A organisation at a company resigns tomorrow. Look beyond what work does not get done and instead try to predict whether the company’s sales, profit, and cash flow growth would eventually suffer from the lack of an FP&A organisation and why.
The company’s profit and loss (P&L) will benefit immediately from the removal of the FP&A headcount and related costs, but what P&L hurts are likely to result over the longer term? Would the ‘smaller’ FP&A organisation run a greater risk of making more value-destroying investments – or at least ones that did not optimise value creation? Would it mean revenue growth and/or cost savings opportunities not being identified or invested in? For companies that have never considered – or at least not recently – the intended role of the FP&A organisation, this can be an uncomfortable but enlightening thought process. Implemented correctly, it ultimately allows for a better understanding of the true ‘value add’ of an FP&A organisation.
Continuing the exercise, imagine the company is yours. What would have to be true to increase shareholder value by restoring just one FP&A employee to the payroll? What role and tasks are so critical that you could afford to pay that salary – with full confidence that the benefit to the business will be a multiple of that added cost? As a thought starter, focus on the analysis aspects of FP&A work and imagine that you’re running a newly-created small business. When would you hire the first employees? What would have to be true to cause you to decide to hire the first FP&A analyst?
In theory, the first FP&A hire is justified when the business is complex enough to contain meaningful inefficiencies that cannot easily be seen by management. The value of these losses or missed revenue opportunities must at least exceed the salary of the FP&A analyst. In practice, the inefficiencies should be a multiple of the salary, as the analyst is unlikely to uncover and resolve all of them. How big are the inefficiencies that management could be missing in your business – and how many FP&A analysts does this justify? Is this is how your FP&A organisation is staffed today?
FP&A Data is a Key Enabler to Business Strategy
After the role and size of an FP&A organisation, the next consideration is the type and granularity of data needed. In theory, a company’s combined accounting and financial planning processes and systems should produce all of the data needed by an FP&A organisation to optimise the execution of business strategy.
This is a higher-level objective. Most companies design their accounting system to support US generally accepted accounting principles (GAAP), and their business planning system to support internal planning needs. Management accounting needs, and the interrelationship between the accounting and planning data, is rarely considered in the design phase. Unfortunately for each business performance measure, many businesses report a goal, a forecast and – eventually – the final result.
If the systems and processes producing this data are not in sync, it is usually the FP&A organisation that has to figure it out via manual effort. The more that accounting and financial planning data and systems are in sync with business strategy and performance metrics, the more they equip the FP&A organisation to perform its intended role – and the leaner the FP&A staffing can be for the same business impact.
From Data to Insight to Delivering the Business Strategy
Finally, consider the analysis and influencing function of FP&A. These activities are about delivering insights – not just data – and being able to communicate those insights in a way that influences a business leader to take a better decision.
This requires not only access to the right data on the right timing, but also having the right perspective to translate that data into actionable information on a timing when management is open to taking the decision. Hiring intelligent and articulate FP&A employees solves for most of this, but even the brightest analysts struggle to add value with poorly timed recommendations. The best FP&A organisations schedule their analysis work and recommendations around major business processes for maximum influence.
Efficient and Effective FP&A Organisations
The aforementioned tips provide an outline for incorporating business strategy into FP&A work process, organisation, and system design. FP&A organisations that are designed for optimal efficiency but pay no regard to business strategy and the role of FP&A run a significant risk of being ineffective.
When an FP&A organisation constantly strives for a ‘bigger seat at the table’, it can be a warning sign that it has an opportunity to be more effective. When clarity of business strategy, the intended role of FP&A and a little upfront thinking and planning are combined, it is possible to increase FP&A effectiveness while also improving FP&A efficiency.
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